Pitney Bowes Inc. (NYSE:PBI) Q3 2023 Earnings Call Transcript

Adjusted EBIT grew $5 million to $43 million in the quarter. This EBIT growth was offset by higher interest expense resulting in adjusted EPS of 0 in the quarter. Turning to cash flow. GAAP cash from operating activities was $25 million and free cash flow of $15 million. Free cash flow is up in the quarter and year-to-date versus prior year. Let’s dive into our 3 business segments. I’ll start with SendTech. SendTech reported revenues of $318 million in the quarter, down 3% compared to prior year. EBIT margin expanded 200 basis points, driven by improved productivity. Let’s start with revenue. We continue to make progress on our product refresh and are now 68% through the USPS technology migration, which is up 20 percentage points from prior year.

Our success in placing advanced compliant equipment puts us in a different stage of our product life cycle. We will increasingly have more fixed-term lease renewals and less new lease opportunities. From a financial perspective, this shift drove equipment sales down 8% and contributed to increasing financing revenue by 1% compared to prior year. This is a net positive to cash flow. Support service revenue declined in line with the overall mail market and as a result of exiting certain unprofitable contracts to service equipment of third parties. Shipping continues to be a growth area for SendTech. In the quarter, total shipping-related revenue grew 6% over prior year and now comprises over 12% of total SendTech revenue. We remain very encouraged by the traction our shipping products are receiving, especially with enterprise clients.

Despite top line pressures, we expanded gross profit margin by 300 basis points. We continue to lower the cost of equipment manufacturing and freight, which contributed to the year-over-year margin expansion. Our commitment to drive efficiency in our sales and customer service operations remains a top priority. We continue to modernize SMB client processes, driving a 25% year-over-year decline in total customer service calls and increasing our customer satisfaction scores to 86% in North America. The cost of goods sold and operating expense improvement that we are pursuing drove adjusted segment EBIT growth of 3% over prior year, and we are redoubling our attention on simplifying the business and optimizing execution. I’ll spend a moment on the performance of financial services inside of SendTech.

Financial Services remains an important component of the business, providing valuable client solutions and steady returns. We are executing on our previously announced program where our bank will participate in the financing of select captive lease receivables and initiatives that will be good for the bank and the enterprise overall. The health and quality of our portfolio continues to demonstrate the durability of our offerings. Finance receivables remained steady at $1.2 billion. Write-offs continued to be low and roughly flat quarter-over-quarter. Next, let’s turn to Presort, which had another outstanding quarter. Presort generated revenue of $152 million in the quarter, up 5% from prior year. Total sortation volume declined 5% to 3.6 billion pieces, but revenue per piece expansion more than offset volume decline.

Growth in higher-yielding mail classes contributed to the increased revenue per piece. Adjusted segment EBIT for the quarter was $29 million, an increase of 42% compared to last year. Adjusted segment EBIT margin also expanded almost 500 basis points to 19%. The 3 main sources of margin improvement were: higher revenue per piece, lower unit transportation cost and most importantly, continued labor productivity gains from our investment in new automation. For example, over the past 2 years, we have refreshed almost 20% of our sorter fleet, which contributed to an 8% year-over-year labor productivity improvement as measured by pieces fed per labor hour. We expect this positive momentum to carry into the fourth quarter. Let’s shift to global e-commerce.

Segment revenues were $313 million, down 1% versus prior year. Adjusted segment EBIT was a loss of $42 million compared to a loss of $35 million last year. Year-over-year declines on both the top and bottom line were primarily driven by the change in 2 large cross-border client relationships that occurred earlier this year. In total, cross-border revenue declined $57 million and gross profit of $13 million versus prior year. Cross-border stabilized quarter-over-quarter. However, it will remain a drag on a year-over-year comparison through first quarter 2024. Turning to domestic parcel. We processed 51 million packages in the quarter, representing growth of 38% year-over-year. We continue to gain market share, driven by the value of our offerings, our strong service levels and high client satisfaction.